Bio & Life Sciences Opinion

Why VC’s Shortchange Healthcare IT—And How to Change It

Some are celebrating the increasing levels of venture capital flowing to health information technology startups. But I’m in the business of cloud-based electronic health record services, and I’m not celebrating. In fact, I consider current levels of VC funding for my industry to be tragic.

In a 2013 first quarter report, Mercom Capital Group reported that “the sector continues to explode in another record quarter with almost half a billion dollars ($493 million) raised.”

But VC levels pale in comparison to what the federal government has ponied up: $30 billion under the HITECH Act to encourage adoption of health IT. Venture funding for other health sectors—biopharmaceuticals, medical devices and equipment, and health care services—has been significantly stronger than for medical software and information services.

Why does health IT get such short shrift from investors? Three reasons:

1. Healthcare consumers don’t shop. Insatiable hunger for better gadgets has fueled constant innovation in the consumer technology market. Shoppers are engaged, eager, and willing to snatch up new products as quickly as they hit the shelves. Would the iPhone have come to market if consumers didn’t have choice and deep pockets? The same economy is not at play in healthcare.

With hardly an exception, patients can’t shop for healthcare. Why compare prices if you have no choice? Caregivers can’t shop for healthcare either. Few doctors know the true cost of tests and treatments they refer patients to. The setup leaves caregivers with little incentive to differentiate themselves by embracing innovative care delivery practices.

2. The biggest buyer stifles innovation. The government is the biggest buyer in the healthcare market. In fact, it represents more than half of all healthcare buying in the U.S. Unfortunately, the big spender has not prioritized supporting innovation, but rather minimizing the scenario of maximum regret: the audit, the lawsuit, the death. This compliance burden breeds risk-averse behaviors among healthcare providers, not creativity. Furthermore, the government rewards caregivers for a narrowly defined set of activities, limiting their appetite for innovation and thus for entrepreneurial services and technology.

3. Service, quality, and competitive pricing aren’t rewarded. By and large, doctors continue to be paid based on how many services and tests they provide. Here and there, they are also paid for reporting some data. They are not commonly incentivized to compete on price and quality, and there’s no obvious way to display that information for shoppers.

What if an imaging center wanted to run a sale during low utilization periods, and a primary care physician could find that out before referring a patient for an MRI? The patient could save money, the caregiver could be reimbursed for saving the system money, and the insuring party and patient employer could, in the long run, reduce their premiums.

Only recently have doctors been introduced to alternative health management payment models that reward them for reducing cost while keeping patients healthy—imagine that! As these models become more common and bring about an increasingly competitive and transparent market, the best caregivers will rise to the top and those who don’t perform will lose.

How can healthcare IT innovators overcome these obstacles and attract VC money? Three thoughts:

1. Do good and do well. In healthcare, there’s no point in doing well financially if you’re not improving outcomes or supporting caregivers. Be more than a bright idea. Move the needle in a measurable way toward improving patient care, helping caregivers be more efficient, or making or saving money. If you’re solving real problems and alleviating pain, you stand a chance to make it and the money will come.

2. Get noticed. It all falls apart if the product isn’t as good as or better than the next guy’s. But amidst the noise and shortened attention spans, being seen and heard is paramount to those investment dollars finding you. If you’re the best in the world at what you do, you better also be best at telling your story and explaining your value to a room full of people who don’t get it, don’t care, and have other priorities. It’s all in the pitch and oftentimes you’ll have one chance to make it sing and make it matter. Be ready.

3. Serve the market that has a lot of buyers! Outside of consumer products, not many industries have expansive target markets. But think about how many folks touch healthcare delivery—from doctors to specialists, from nurses to technicians, and more. Build a strong solution and make sure it’s not so unique that it’s only useful to small audiences.

To be sure, the healthcare IT sector is not just suffering a shortage of capital. There is a dearth of entrepreneurs and innovation here too. One reason is that companies like athenahealth, which still feels sometimes like the startup we once were, need to step up. It’s what our More Disruption Please program aims to do. A couple of times a year, we host three-day innovation confabs at our hilltop facility on the coast of Maine, bringing together the latest ideas for health IT in a collaborative setting.

We do more there than just share our thoughts and visions. We seek out talent and if we can find a good fit, we’ll capitalize you. We’re looking for true innovators—like Entrada, iTriage, and WellFrame. If you’re a game designer, put aside the mad birds and flying bricks for a second and work on one with needles and bandages. It will be fun! And we can heal the world together.

Funding health IT innovation with $1.2 billion per year in VC money is bubkus. The steps above will change mindsets and, we hope, drive the exponential increases in VC interest and capital commitments that our industry requires.

Jonathan Bush is Chief Executive Officer, President, and Chairman of the Board of Directors at athenahealth, Inc. He co-founded the company in 1997 and has been a director since its inception.

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  • leomund

    The reason VCs don’t fund HCIT is because every company compares themselves to Athena and wants a 7x revenue multiple. In addition, there are thousands of tiny companies that will probably never scale up to significant revenue making it very challenging to determine which will be worth the valuation the founders want. Finally, there is no IP/competitive barriers unlike medical devices and drugs so even if a company has an interesting offering, it can be easy for the big guys to copy. How many acquisitions do the big HCIT players make? Compare that to other industries and I bet it’s much lower. I doubt many VCs have made much money investing in HCIT.

  • http://twitter.com/KenOnHIT Ken Congdon

    Much like his talk at TEDMED, this is another passionate and controversial post by Jonathan Bush advocating entrepreneurship in healthcare. While I agree with portions of Bush’s free market plea, there’s one huge difference between healthcare and the coffee and consumer electronic markets Bush has used as comparisons.

    The difference is this – Consumers like coffee, they want coffee. Consumers like iPhones and they want the latest gadgets. People don’t want to get sick. Outside of cosmetic surgery, people don’t want to buy healthcare. Most of the time, it’s a necessary expense that they would avoid if they could (like gasoline and electricity).

    Sure, when they are sick, people want to get better, and they might be willing to pay more on a more innovative service, but how innovative can a lot of services get? Is a colonoscopy from one provider really going to be that much better than a colonoscopy I receive from another? Even if it is, as a consumer would I be willing to pay that much more for this service?

    • gordmass

      Good thoughts and agree about J Bush’s passion.

      I would suggest that there is less of a difference than you propose.

      There are examples abound where prevailing thinking for healthcare and many other industries was ‘how innovative can you get’. A great example was lettuce until the innovation of chopping it and bagging it came along. Well, yes, people want lettuce; but the point is who would have ever thought of such an innovation until it was introduced.

      In healthcare, there are incremental yet powerful innovations for services ‘nobody actually wants’. An example is CVS MinuteClinic – the innovation here was embarassingly simple but not remotely close to the prevailing thinking. The innovation… actually posting your pricing for everyone to see and no appointments ever needed. Not all that fancy, but it has led them to become essentially the largest healthcare provider within a decade’s time. Again, this innovation was to employ the exact opposite of what the dominant regional healthcare entities employed.

      Another example is Shouldice Clinic, whose service certainly nobody would hope to use. They also introduced an innovation that was and is still criticized, but tremendously successful ( I can hear the comments coming already by many). Though innovations by their very nature are controversial, perennially dismissed, and often while they eat up market share and/or delight consumers of their output.

  • Jakob Boije

    Thanks for the breakdown Jon, I like the Do Good and Well part, that should be a shared aspirational driver for many in the industry.